Section 35D deduction denied to REIT: ITAT Bangalore holds preliminary-expense amortisation for public subscription is company only benefit
Summary: The Bangalore Tribunal in Embassy Office Parks REIT v. Deputy Commissioner of Income-tax dismissed the appeal filed by Embassy Office Parks REIT and upheld the disallowance of deduction claimed under section 35D(2)(c) of the Income-tax Act for amortisation of IPO and listing expenses for AY 2021-22. The REIT had claimed deduction of one-fifth of expenditure incurred on its initial public offer and listing of units on the NSE and BSE, contending that a listed REIT raising public capital should be treated on par with a listed company and that section 35D(2)(c) should be interpreted liberally. The Revenue argued that clause (c) expressly applies only where the assessee is a company. The Tribunal held that the words “where the assessee is a company” are a deliberate statutory limitation, that the assessee is neither a company under the Companies Act nor under section 2(17) of the Income-tax Act, and that REIT units are distinct from shares or debentures. Relying on Commissioner of Customs (Import) v. Dilip Kumar & Company, the Tribunal held that deductions and exemptions in taxing statutes must be strictly construed and confirmed the disallowance under section 35D(2)(c).
1. BACKGROUND OF THE CASE
Embassy Office Parks REIT, an irrevocable trust settled under the Indian Trusts Act, 1882 and registered with SEBI under the SEBI (Real Estate Investment Trusts) Regulations, 2014, filed a nil-income return for AY 2021-22 declaring a loss of approximately Rs. 57.71 crore. In computing this loss, the REIT claimed a deduction of about Rs. 66.63 crore under section 35D of the Income-tax Act, 1961, representing one-fifth of the expenditure incurred on its initial public offer and the listing of its units on the NSE and BSE.
Section 35D permits amortisation of specified preliminary expenses over five years. While clauses (a) and (b) of section 35D(2) apply broadly to Indian companies and resident non-company assessees alike, clause (c) is narrower, it covers underwriting commission, brokerage, and prospectus-related drafting, printing and advertisement costs, but expressly only “where the assessee is a company.”
The Assessing Officer disallowed the REIT’s claim on the ground that it is assessed as an AOP/BOI and not as a company, and clause (c) is therefore unavailable to it. The CIT(A) upheld this disallowance. The REIT carried the matter to the Tribunal, arguing that a listed REIT raising capital through public subscription of units is functionally indistinguishable from a listed company and should be treated at par for the purposes of clause (c).
2. ASSESSEE’S SUBMISSIONS
Before the Tribunal, the assessee’s principal arguments were:
- Section 35D(2)(c) should be read harmoniously and liberally, and its benefit extended to REITs, since incentive/deduction provisions with a beneficial object merit a liberal construction.
- The reference to “company” in clause (c) reflects the historical reality of 1971, when only companies could list securities on stock exchanges; non-corporate vehicles such as trusts could not. Since the SEBI (REIT) Regulations, 2014 now permit trusts to list units in a manner comparable to companies, the rationale for excluding trusts no longer holds.
- A listed REIT incurs the same categories of expense as a company raising public capital i.e, underwriting commission, brokerage, drafting, printing and advertisement of the offer document and files disclosures broadly comparable to the SEBI ICDR framework applicable to companies.
- Denying the deduction merely because the corporate form was not adopted would defeat the object of section 35D, which is to spread capital-raising costs over several years.
- Reliance was placed on Bajaj Tempo Ltd. v. CIT, CIT v. Straw Board Mfg. Co. Ltd., Broach District Co-operative Cotton Sales Ginning & Pressing Society Ltd. v. CIT, K.P. Varghese v. ITO, CIT v. J.H. Gotla, and CIT v. K.S. Vaidyanathan, for the proposition that beneficial and incentive provisions should be construed purposively, in line with legislative intent, and so as to avoid absurd or unjust results.
The Revenue, represented by the CIT-DR, supported the lower authorities’ orders, submitting that clause (c) is confined in terms to companies and that harmonious or beneficial construction cannot be stretched to extend a deduction expressly granted to one class of assessee to an entirely different class.
3. CORE FINDINGS OF THE TRIBUNAL
The Tribunal dismissed the appeal and upheld the disallowance in full, reasoning as follows:
- Clear and unambiguous language: The opening words of clause (c), “where the assessee is a company,” are a deliberate legislative limitation, not surplusage. Applying Commissioner of Customs (Import) v. Dilip Kumar & Company [2018] 95 taxmann.com 327 (SC), a Constitution Bench authority holding that deductions and exemptions in taxing statutes must be strictly construed, with any ambiguity resolved in favour of Revenue, the Tribunal held that a benefit expressly confined to companies cannot be judicially extended to a non-corporate assessee.
- REIT is not a company: The assessee is neither a company under the Companies Act, 2013, nor a company by extended definition under section 2(17) of the Income-tax Act. Chapter XII-FA (sections 115UA and 115UB) creates a distinct pass-through taxation code for business trusts, confirming that REITs are treated as a separate fiscal category, not as companies.
- Units are not shares or debentures: Clause (c) is tied specifically to expenditure on the issue of “shares or debentures of the company.” REIT units are a distinct class of security under the SEBI (REIT) Regulations, 2014 and the amended definition of “securities” in the Securities Contracts (Regulation) Act, 1956. SEBI’s classification of REIT units as equity instruments for mutual fund categorisation purposes is regulatory and context-specific and does not convert units into shares for section 35D purposes.
Accordingly, the Tribunal confirmed the disallowance under section 35D(2)(c) and dismissed the REIT’s appeal.
Author’s view
On a plain reading of the law, the Tribunal’s decision appears difficult to fault. Section 35D(2)(c) is specifically drafted to grant the benefit of amortisation only where the assessee is a company and the expenditure relates to the issue of shares or debentures. These are not incidental requirements but express statutory conditions. The Tribunal’s reliance on the Supreme Court’s decision in Commissioner of Customs (Import) v. Dilip Kumar & Company is therefore understandable, as the judgment reiterates that tax incentives and deductions must be interpreted strictly and cannot be extended beyond the language chosen by the legislature.
At the same time, the case highlights a genuine gap in the law rather than any ambiguity in drafting. Section 35D was enacted in 1971 when companies were the primary vehicles for raising capital from the public. Business structures such as REITs/InvITs were not part of the regulatory landscape. Today, however, these entities raise public capital through SEBI-regulated offerings, undertake extensive disclosure obligations and incur substantial expenses on underwriting, brokerage, offer documents, advertising, listing and related activities. From a commercial perspective, these costs are substantially similar to those incurred by companies undertaking an IPO.
This commercial reality forms the strongest aspect of the assessee’s case. A REIT accessing public markets performs an economic function broadly comparable to a company raising funds through the issue of shares. Consequently, the argument that similar expenditure should receive similar tax treatment is neither unreasonable nor without merit. However, commercial equivalence alone cannot override statutory language. The difficulty for the assessee is that Section 35D(2)(c) contains two clear eligibility conditions: the assessee must be a company, and the expenditure must relate to shares or debentures. A REIT satisfies neither of these requirements.
The real issue, therefore, is not whether REITs perform functions similar to companies. The issue is whether the law should evolve to recognise changing business structures and provide similar tax treatment for comparable capital-raising activities. In my view, this is a matter best addressed through legislative amendment rather than judicial interpretation. If policymakers consider it appropriate to place REITs and InvITs on par with companies for this purpose, the Act can be amended to expressly include such entities within the scope of Section 35D.
The practical takeaway is clear. Under the current law, IPO, listing and public issue expenses incurred by REITs, InvITs and other business trusts are unlikely to qualify for amortisation under Section 35D. Given the significant costs involved in such transactions, sponsors and advisors should factor this position into transaction planning and evaluate alternative tax treatments wherever available.
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